Winner’s curse in cricket

As in most other auctions, investors in the IPL business also seem to have misspent their money initially

The lives of millions of Indians have settled into a predictable pattern these days—escape from the workplace as early as possible, reach home and then settle down in front of the television to watch the Indian Premier League (IPL).

The cricket has been engrossing, the level of interest drummed up has confounded sceptics and we have seen some signs of other parts of the entertainment industry suffering because of the IPL mania. I actually drove past half-empty restaurants on Saturday night and a couple of high-profile new films have run before thin audiences. The IPL has been a grand success, at least till now.

But there is a dark spot as well. The millions that were coughed up by companies and film stars to buy team franchises and individual players during the high-profile auctions earlier this year took the cricketing world by storm. However, halfway through the first IPL season, there seems to be a very weak link between the money spent and actual performance on the turf. As in most other auctions, investors in the IPL business also seem to have misspent their money initially.

Take a look at the team rankings at this stage of the tournament. Rajasthan Royals have surprised most spectators by climbing to the top of the eight-team league. It is also the team that was bought at the lowest rate—Rs268 crore. In an ironic symmetry, the three teams at the bottom of the heap are the most expensive ones—Hyderabad Deccan Chargers (Rs428 crore), Mumbai Indians (Rs448 crore) and Bangalore Royal Challengers (Rs448 crore).

A similar pattern crops up when performance of the individual players is concerned. I am not sure how individual performances should be tallied in the Twenty20 (T20) format. Should you look at the average runs scored per innings by a batsman or his strike rate or some weighted average of the two? Does a bowler have to be judged by the number of wickets he takes or the average runs he gives in every over he bowls or some combination of the two? Proper metrics have not yet been developed.

But I took a look at the individual rankings on the official IPL website earlier this week. The Top 5 batsmen on Monday night were Gautam Gambhir, Virender Sehwag, Matthew Hayden, Brendan McCullam and Rohit Sharma. The Top 5 bowlers were Irfan Pathan, Ajit Agarkar, Sohail Tanvir, Zaheer Khan and Manpreet Gony. Some of them topped the auction price lists. But overall, not too many of the batsmen and bowlers with heart-stopping valuations feature prominently in these lists of personal performance. No Mahendra Singh Dhoni (though he has admittedly been a cool-headed captain) or Andrew Symonds or Sanath Jayasuriya there.

What’s up? Most auctions—be they for works of art or telecom licences— suffer from what economists describe as the winner’s curse. This is the tendency to get sucked into a bidding war. Bidders tend to get carried away and pay astronomical prices. Cooler heads could have bough the asset cheaper. Suppose Company A bids Rs10,000 crore for an oilfield, while Company B loses out by bidding only Rs7,000 crore. Now the winner could have bagged the oilfield by paying only a rupee more than the losing bid, but shelled out Rs3,000 crore extra. That is the winner’s curse.

The early days of the IPL suggest that there is a version of the winner’s curse at play here as well. There has been overbidding and payments that are far in excess of actual performance. Of course, it is too early for buyer’s regret to set in: a “what have I gone and done” moment that can afflict many successful bidders. T20 may be a quick shot of entertainment, but the IPL business model is for the long term.

It is easy to jump from here to a hasty conclusion that this is yet another case of markets gone wrong. Ban cricketing auctions. Ban forward markets in agriculture. Ban derivatives trading. One can almost expect parliamentarians spouting some more economic nonsense the next time they get a chance.

Markets are learning mechanisms. Information is transmitted through prices. And mistakes usually get minimized over time. I hazard a guess here. There will be fewer bidding mistakes the next time around. Bidders will learn from their mistakes and they will also have the benefit of examining the record of actual performances on the field. Perhaps there will be more interest in younger players. And good spinners?

“Experienced bidders avoid the winner’s curse by bidding cautiously… Laboratory experiments corroborate this: the subjects bid too high initially, but as they become more practiced, they tend to adjust and avoid overbidding. Alert winners are not cursed,” writes Stanford University economist John McMillan in his wonderful book, Reinventing the Bazaar: A Natural History of Markets.

Cricket auctions promise to be long and exciting game.

Your comments are welcome at cafeeconomics@livemint.com